(Bloomberg) -- A top-performing Chinese quantitative hedge fund offered zero performance fees to keep investors from quitting after suffering record losses in recent weeks, the latest casualty of wild swings in the nation’s stock market.
Shanghai Power Asset Management Co. feels “deeply guilty” for investors in its options-trading products, according to a statement on its WeChat account on Wednesday. The company said it would consider a permanent exemption on performance fees if clients are willing to buy its new products.
The firm’s FuRao Arbitrage No. 3 fund dropped 13.5% for the year through Oct. 18, cutting the return since its inception over a year ago to 4.8%, according to data compiled by Shenzhen PaiPaiWang Investment & Management Co., which tracks Chinese hedge funds. The company, which manages more than 500 million yuan ($70 million) in funds, was the third-best performer for options strategy with a 21.7% return for the year ended May 31, the data showed.
Power Asset’s woes add to recent setbacks plaguing Chinese quants, a 1.6 trillion yuan industry still recovering from a meltdown in February and facing heightened regulatory scrutiny. Their market-neutral products suffered widespread losses in recent weeks after the rally in stocks squeezed short positions. Top player Zhejiang High-Flyer Asset Management exited the strategy last week.
Power Asset also said it will shift away from strategies that take a market-neutral stance and instead focus on products with long exposures in the future. Earlier this month, it suspended management fees on some options products for a month, citing “record drawdowns.” The company declined to comment further.
FuRao Arbitrage No. 3 mainly uses a strategy that exploits differences in implied volatility among options with different strike prices or expiration dates. Power Asset uses machine learning models to adjust its entry and exit points, according to PaiPaiWang.
The fund fell in each of the past four weeks, with combined losses of more than 16%, according to performance data seen by Bloomberg News. During the period, the CSI 300 Index jumped as much as 33% before retreating by up to 11% from the Oct. 8 peak.
The volatility index, known as a fear gauge that measures market expectations of future volatility, went through a similar path, according to Shanghai-based Galaxy Technologies, which provides derivatives pricing and risk management tools to financial institutions.
While extreme swings can provide arbitrage opportunities, if it expands instead of converging “then engaging in such trades could mean having to withstand significant paper losses,” said Liu Fuchen, co-founder of GalaTech.
Such unrealized losses would only leave a big drawdown in net asset value if the investor can avoid cutting positions, otherwise they can become real losses, Liu said, noting that volatility indices remain elevated.
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